More takeovers in the water works

The sale of Northumbrian to Li Ka-Shing could be just the start of a wave of deals in the water industry

After weeks of speculation and uncertainty, the board of Northumbrian Water yesterday unanimously recommended that shareholders accept the 665p-per-share cash offer from Hong Kong billionaire Li Ka-Shing's Cheung Kong Infrastructure (CKI).

Click HERE to view graphic (91k jpg)

The deal represents a 26.4 per cent premium to the share price before the takeover talks became public in late June, valuing the FTSE 250-listed utility at £4.7bn.

It also puts paid to warnings that the industry's most recent regulatory price review – which runs from 2010 to 2015 – set conditions so tough they would materially affect the industry's ability to attract investment. And with the watchdog Ofwat softening its stance on mergers and acquisitions, the CKI/Northumbrian deal could be the vanguard of a spell of consolidation in the fragmented water sector.

Sir Derek Wanless, the chairman of Northumbrian Water, yesterday described CKI's offer as being priced at an "attractive premium" to both the regulated capital value and the group's pre-offer share price.

"Whilst Northumbrian would have a strong future as an independent company, the offer fairly values the current and future prospects of the company," Sir Derek said.

CKI confirmed that Northumbrian would be incorporated into a new company, to be called UK Water, with the existing management team remaining in place.

H L Kam, the group managing director of CKI and a director of UK Water, said: "We attach great importance to the skills and experience of the existing management and employees of Northumbrian and believe they will be an important factor in the continuing success of the Northumbrian Group."

CKI already owns a spread of infrastructure assets in the UK, including electricity networks that it bought from the French group EDF for £5.8bn last year.

But to avoid a Competition Commission referral for the Northumbrian deal, the group is off-loading its other water-sector asset, Cambridge Water, to HSBC for £74m. The decision on Cambridge Water reflects Ofwat's historical reluctance to allow mergers in the sector, borne out of its concern to maintain a broad base of performance comparators. But earlier this year the regulator's chief executive, Regina Finn, hinted at a relaxation of merger controls as part of wider plans to boost competition in the sector. And there is now a growing expectation across the once-sleepy industry of major changes to come.

In part, it is the stringencies of Ofwat's own most recent price and investment review – know as PR09 – that is piling pressure on water companies and nudging the sector towards consolidation.

Duncan Michie, a director in the utilities consulting practice at PricewaterhouseCoopers, is expecting more takeover talks, among both listed and unlisted companies.

"The Northumbrian deal demonstrates that in spite of PR09, there is still value in the water sector," Mr Michie said.

"And there's a whole range of potential efficiencies that water companies can't fully exploit at the moment, but which they will be able to take advantage of as we see changes to the merger regime," he added.

The next step could be either typical consolidation through mergers and acquisitions, or it could be the adoption of new models for exploiting economies of scale, such as joint ventures, or resource-sharing arrangements, or water trading across the industry's traditionally discrete geographical regions.

"We are at the point where there is pressure to innovate, either through consolidation or through thinking of new ways of getting the benefits of scale," Mr Michie said.

There is certainly considerable support for deregulation among some of the biggest players in the water sector.

Tony Wray, the chief executive of FTSE 100-listed Severn Trent, has long been a vocal proponent of change, calling for the sector's 21 companies to come down to as few as 10, and for water trading to make the most of scarce resources.

According to Mr Wray, such developments are the only way to meet the challenge of climate change.

"To guarantee security of supply and manage the effects of flooding we need more efficient networks, and that is best achieved by having some consolidation," he told The Independent. "Consolidation could also deliver greater capital efficiency – which is significant because tens of billions of pounds worth of investment are still required."

There are already signs of movement. Industry insiders are discussing HSBC's likely sale of Cambridge Water. Agbar is reportedly looking to sell its 70 per cent holding in Bristol Water, which abuts both Severn Trent and Wessex Water territory. And there is also growing speculation about the future of Veolia's three water-only subsidiaries. "We may be at the start, but it is not going to be an overnight transformation," Mr Wray said. "It will be a gradual change in response to the challenge about how the industry finances its massive capital requirements."

Meanwhile, although the water sector's long-term, stable returns are looking more attractive than ever – even compared with once-reliable sovereign debt – there are significant questions about where the finance for future consolidation deals might come from.

Deep-pocketed CKI may not be affected by the credit crunch. But the infrastructure funds that have snapped up the majority of Britain's once-listed water companies have relied on the kind of cheap debt that is in short supply in the aftermath of the credit crunch.

"There aren't that many CKIs around so the interesting question is whether the infrastructure funds will come back into the market," Doug King, a vice chairman at Deloitte, said. "There are attractive investments, and there will continue to be; whether there are the right buyers is questionable."

There is also another slug of regulatory uncertainty to contend with. Although PR09 has set out thereturns for the five years up to 2015, Ofwat is also exploring options for boosting retail competition, and there is also a Government white paper that will look at the long-term shape of the industry. That white paper is due to be published in November.

"You could take the view that the Government and regulator will be sensible, but most infrastructure funds would want clarity from the white paper before doing anything significant," Mr King said.

So, while the uncertainty over Northumbrian Water's future appears finally to be settled, the upheavals for the industry as a whole may just be only beginning.

Arts and Entertainment
Stik on the crane as he completed the mural
Happy in his hat: Pharrell Williams
i100(More than you think)
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Arts and Entertainment
John Hurt will voice Prince Bolkonsky in Radio 4's War and Peace
radioRadio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
ebooksNow available in paperback
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up